Oh, well, we just like forgot to put that in

david52_gwApril 17, 2013

"Carmen Reinhart and Kenneth Rogoff are two very, very well-respected Harvard economists. They are the authors of a very well-received account of the financial crisis and its antecedents. In 2010 they released a paper that is among the most influential economic papers of the modern era. The paper argued that countries with a debt-to-GDP ratio above 90 percent average negative GDP growth. (The paper also suggested that correlation is causation, in the direction neoliberal misers prefer.) In other words, this was, for many people, concrete proof - with numbers and a chart - that government debt is bad for the economy and should be reduced even in the midst of a recession and an employment crisis. The authors have briefed leaders and legislators around the world on their finding, and the paper has essentially been used to justify most debt hysteria around the world, since its publication.

But! Whoops, turns out they were wrong, about that one central fact that has been repeated as the gospel truth by purveyors of Tough Talk on debt the world over for the last three years. They screwed up their spreadsheet. Turns out average GDP growth in countries with debt-GDP ratios 90 percent and higher is positive, not negative.

The error was revealed in a new paper by Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst, and written about by Mike Konczal. Those authors also noted a couple of counties [sic] had years of data excluded - data that would’ve undermined Reinhart and Rogoff’s argument - and criticized the way Reinhart and Rogoff weighted each country’s data in a way that privileges years of high debt and low growth over years of high debt and regular growth.

The reason we are just now getting critical second looks at Reinhart and Rogoff’s findings, when the paper in question came out in 2010, is that the economists just didn’t release their data. Here’s Dean Baker complaining about that fact in 2010. As he wrote: “Mr. Rogoff and Ms. Reinhart have declined to adhere to standard ethics within the economics profession and have refused to share the data on which they base their conclusion with other researchers.”

This is important -it should in fact be a Big Deal - because Reinhart and Rogoff have been the ultimate authorities in the appeals to authority from everyone advocating austerity in the U.S. and across the world for the last few years. Tim Fernholz excerpts Tom Coburn’s account of the address the two gave to 40 senators, and quotes officials and politicians from Europe and the U.S. and from both sides of the American party divide praising Reinhart and Rogoff’s study.

So, austerity’s canceled, right? Haha, no, sorry.

The problem is that debt moralists used the study to justify a political belief, and they will not shed that belief now that the study has been shown to be flawed. The idea that debt is just innately bad, and indicative of a sort of national deficiency of character, will persist. It’s not based on data, it’s based on facile analogies to kitchen table checkbook balancing and “common sense” about how it is always necessary to “live within your means.” We already have plenty of evidence that austerity doesn’t boost economies, and no one cares. No one will care about this.

It is sort of shocking, to me, that respected economists can release a widely cited paper without just putting their damn Excel spreadsheet online for people to check their work, but apparently the economics field operates at a lower level of scrutiny than elementary school arithmetic. Next time you hear someone on TV confidently state that “economists say” that high debt kills economic growth remind yourself that they’re chanting a mystical incantation, not referencing objective data."

Debt will continue to consume a larger and larger portion of our nation's revenue. What are the options to bringing it down?

Inflation. Print more money.
Higher taxes to pay down the debt.
Spend less and pay down the debt.
Grow the economy.

I'm sure there's other ways to pay down the debt, but my mind is blank right now.

Anyway, the problem is that with a global economy, I don't think we are going to "grow" our way out of the debt as we did after WWII.

I don't know what the answer is. Austerity brings hardships right now, but if debt consumes more and more of our income, we will have even more severe austerity down the road. Or severe inflation. Or austerity and severe inflation.

Regardless of what we do, it's gonna' suck, imo.

I just hope the republicans (with more and more democratic help), don't manage to destroy social security and medicare in the meantime.

"Next time you hear someone on TV confidently state that “economists say” that high debt kills economic growth remind yourself that they’re chanting a mystical incantation, not referencing objective data."

Good advice, David. I'd venture a guess that a lot of us have little faith in some "statistics" and the proclamations of some "experts".

We are a nation born in debt never out of debt for over 200 years. One of the elected clowns in chief thought it would be a great idea to put a dent in the revenue stream another clown did the same.
We lose money hand over first in Afghanistan & Iraq and and the best most folks can come up with is attacking urban welfare mythology.

I've been reading around economic blogosphere and even conservative academic types are struggling to defend the series of errors in the models and manipulations in the original study. Apparently, the brouhaha started with good intentions of revisiting the methodology and data bases used in the original study. Found to be a house-of-cards with 2-3% swing in growth rates in GDP, meaning the supposed negative growth rates were actually better than projected, even with decent growth rates in spite of national debts.

That commie rag, NYT, admits the miscalculation and then has a number of quotes saying that the theory is still valid even though there is an error. In the opening paragraphs, there are these admissions:
The Harvard economists’ [Reinhart and Rogoff] research was always more nuanced about the causal relationship between debt and growth than the popular view. Some economists expressed skepticism of the “threshold” theory to begin with. And many others noted how hard it could be to draw straight lines between debt and economic growth, given the panoply of factors at work.

And then -- in spite of endorsing Reinhart and Rogoff - here comes the final paragraph: The seemingly esoteric debate within the economics profession has collided this week with a broader challenge to excessive budget-cutting in countries around the world. The I.M.F. cautioned Washington against cutting its budget too fast, too soon, even as it saw the American economy strengthening. And on Tuesday, Olivier Blanchard, the fund’s chief economist, warned that Britain was “playing with fire” with its austerity policy.

People need to rinse out ther brains when it comes to what constitutes either money or debt or even surplus-it is a house of cards held up by belief and faith and that is why austerity doesnt work. Like Tinkerbell dying if you believe she lives-that is the basis of national economies-when people lose faith in them they die. Money is an illusion.

NEW YORK (Reuters) - When Thomas Herndon, a student at the University of Massachusetts Amherst's doctoral program in economics, spotted possible errors made by two eminent Harvard economists in an influential research paper, he called his girlfriend over for a second look.

As they pored over the spreadsheets Herndon had requested from Harvard's Carmen Reinhart and Kenneth Rogoff, which formed the basis for a widely quoted 2010 study, they spotted what they believed were glaring errors.

"I almost didn't believe my eyes when I saw just the basic spreadsheet error," said Herndon, 28. "I was like, am I just looking at this wrong? There has to be some other explanation. So I asked my girlfriend, 'Am I seeing this wrong?'"

His girlfriend, Kyla Walters, replied: "I don't think so, Thomas."

In the world of economic luminaries, it doesn't get much bigger than Reinhart and Rogoff, whose work has had enormous influence in one of the biggest economic policy debates of the age.

Both have served at the International Monetary Fund. Reinhart was a chief economist at investment bank Bear Stearns in the 1980s, while Rogoff worked at the Federal Reserve, passing through Yale and MIT before landing at Harvard.

Their study, which found economic growth slows dramatically when a government's debt exceeds 90 percent of a country's annual economic output, has been cited by policymakers around the world as justification for slashing spending.

Former U.S. vice presidential candidate Paul Ryan, a Republican congressman from Wisconsin, is one influential politician who has cited the report to justify a budget slashing agenda.

Using the two professors' data, Herndon found that instead of a dramatic fall in growth, the decline was much milder, slowing to about 2.2 percent, instead of the slump to minus 0.1 percent that Reinhart and Rogoff predicted.

Things tend to move at a glacial pace in the world of academic research papers, but within 24 hours Herndon and his two teachers, who co-authored the report, Michael Ash and Robert Pollin, found themselves swept up in a global debate.

Herndon's paper began life as a replication exercise for a term paper in a graduate econometrics class. He expected to replicate Reinhart and Rogoff's results, then challenge the idea that high public debt caused growth to slow.

But he never got that far. Repeated failures to replicate the results roused his interest. Pollin and Ash encouraged him to pursue it after he convinced them he was onto something.

"At first, I didn't believe him. I thought, 'OK he's a student, he's got to be wrong. These are eminent economists and he's a graduate student,'" Pollin said. "So we pushed him and pushed him and pushed him, and after about a month of pushing him I said, 'XXX it, he's right.'"

Herndon approached Reinhart and Rogoff earlier this year for the spreadsheets they used in their paper. The two professors provided them at the start of April, unlocking the mysteries of the data that had stumped Herndon.

Herndon said only 15 of the 20 countries in the report had been used in the average. He also said Reinhart and Rogoff used only one year of data for New Zealand, 1951, when growth was minus 7.6 percent, significantly skewing the results.

Reinhart and Rogoff have admitted to a "coding error" in the spreadsheet that meant some countries were omitted from their calculations. But the economists denied they selectively omitted data or that they used a questionable methodology.

For Ash, the findings mean the claim that high public debt causes growth to stall no longer holds water.
"Their central thesis has been substantially weakened," he said.

Reinhart and Rogoff, however, say their conclusion that there is a correlation between high debt and slow growth still holds.

"It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful," they said in a joint statement. "We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."

Now that Herndon has ably crossed swords with some of the most eminent figures in his field, he is thinking about expanding his work into a Ph.D. thesis. end quote

snip - In fact, Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact. For example, a Washington Post editorial earlier this year warned against any relaxation on the deficit front, because we are “dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Notice the phrasing: “economists,” not “some economists,” let alone “some economists, vigorously disputed by other economists with equally good credentials,” which was the reality.

For the truth is that Reinhart-Rogoff faced substantial criticism from the start, and the controversy grew over time. As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.

Over time, another problem emerged: Other researchers, using seemingly comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff results. They typically found some correlation between high debt and slow growth - but nothing that looked like a tipping point at 90 percent or, indeed, any particular level of debt.

Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet - and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.” <?i>snip

Well... the larger financial institutions have learned that if they lobby hard enough, regulation will remain in their favor, backs will be turned, eyes closed, and when the house of cards begins to crash down around them, the government will step in and bail them out. All they have to do is remain large enough that when the top cards begin to give way, it will affect the entire world of finance... or something to that effect. It's happened more than once on Wall Street...

"The reason we are just now getting critical second looks at Reinhart and Rogoff’s findings, when the paper in question came out in 2010, is that the economists just didn’t release their data."

Thanks for posting, David. As Sleepless reminded us recently "Not all studies are valid, especially when they do not include relevant and influential data."

That's why you ask to see the data. This has nothing to do with politics. You don't get sidetracked with trivia. For example, personal information, like "I have two degrees in the hard sciences and am published several times and will be published at least three times this year; feel free to fully bring your reasons why you infer this study may not be valid. You won't go over my head on this issue, so go for it without hesitation" is irrelevant. There is no substitute for data, and examining it for oneself.

" It's 4 January 2010, the Marriott Hotel in Atlanta. At the annual meeting of the American Economic Association, Professor Carmen Reinhart and the former chief economist of the International Monetary Fund, Ken Rogoff, are presenting a research paper called Growth in a Time of Debt.

At a time of economic crisis, their finding resonates - economic growth slows dramatically when the size of a country's debt rises above 90% of Gross Domestic Product, the overall size of the economy.

Word about this paper spread. Policymakers wanted to know more.

And so did student Thomas Herndon. His professors at the University of Massachusetts Amherst had set his graduate class an assignment - pick an economics paper and see if you can replicate the results. It's a good exercise for aspiring researchers.

Thomas chose Growth in a Time of Debt. It was getting a lot of attention, but intuitively, he says, he was dubious about its findings.

Some key figures tackling the global recession found this paper a useful addition to the debate at the heart of which is this key question: is it best to let debt increase in the hope of stimulating economic growth to get out of the slump, or is it better to cut spending and raise taxes aggressively to get public debt under control?

EU commissioner Olli Rehn and influential US Republican politician Paul Ryan have both quoted a 90% debt-to-GDP limit to support their austerity strategies.
But while US politicians were arguing over whether to inject more stimulus into the economy, the euro was creaking under the strain of forced austerity, and a new coalition government in the UK was promising to raise taxes and cut spending to get the economy under control - Thomas Herndon's homework assignment wasn't going well.

No matter how he tried, he just couldn't replicate Reinhart and Rogoff's results.

"My heart sank," he says. "I thought I had likely made a gross error. Because I'm a student the odds were I'd made the mistake, not the well-known Harvard professors."

His professors were also sure he must be doing something wrong.

"I remember I had a meeting with my professor, Michael Ash, where he basically said, 'Come on, Tom, this isn't too hard - you just gotta go sort this out.'"

So Herndon checked his work, and checked again.

By the end of the semester, when he still hadn't cracked the puzzle, his supervisors realised something was up.
"We had this puzzle that we were unable to replicate the results that Reinhart-Rogoff published," Prof Ash, says. "And that really got under our skin. That was really a mystery for us."

So Ash and his colleague Prof Robert Pollin encouraged Herndon to continue the project and to write to the Harvard professors. After some correspondence, Reinhart and Rogoff provided Thomas with the actual working spreadsheet they'd used to obtain their results.
"Everyone says seeing is believing, but I almost didn't believe my eyes," he says.

Thomas called his girlfriend over to check his eyes weren't deceiving him.

But no, he was correct - he'd spotted a basic error in the spreadsheet. The Harvard professors had accidentally only included 15 of the 20 countries under analysis in their key calculation (of average GDP growth in countries with high public debt).

Australia, Austria, Belgium, Canada and Denmark were missing.

Oops.

Herndon and his professors found other issues with Growth in a Time of Debt, which had an even bigger impact on the famous result. The first was the fact that for some countries, some data was missing altogether.
Reinhart and Rogoff say that they were assembling the data series bit by bit, and at the time they presented the paper for the American Economic Association conference, good quality data on post-war Canada, Australia and New Zealand simply weren't available. Nevertheless, the omission made a substantial difference.

Thomas and his supervisors also didn't like the way that Reinhart and Rogoff averaged their data. They say one bad year for a small country like New Zealand, was blown out of proportion because it was given the same weight as, for example, the UK's nearly 20 years with high public debt.

"New Zealand's single year, 1951, at -8% growth is held up with the same weight as Britain's nearly 20 years in the high public debt category at 2.5% growth," Michael Ash says.

"I think that's a mistaken way to examine these data."
There's no black and white here, because there are also downsides to the obvious alternatives. But still, it's controversial and it, too, made a big difference.
All these results were published by Thomas Herndon and his professors on 15 April, as a draft working paper. They find that high levels of debt are still correlated with lower growth - but the most spectacular results from the Reinhart and Rogoff paper disappear. High debt is correlated with somewhat lower growth, but the relationship is much gentler and there are lots of exceptions to the rule.

Reinhart and Rogoff weren't available to be interviewed, but they did provide the BBC with a statement.

In it, they said: "We are grateful to Herndon et al. for the careful attention to our original Growth in a Time of Debt AER paper and for pointing out an important correction to Figure 2 of that paper. It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful. We will redouble our efforts to avoid such errors in the future. We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."

Accidents do happen, and science progresses through the identification of previous mistakes. But was this a particularly expensive mistake?

"I don't think jobs were destroyed because of this but it provides an intellectual rationalisation for things that affect how people think about the world," says Daniel Hamermesh, professor of economics at Royal Holloway, University of London.

"And how people think about the world, especially politicians, eventually affects how the world works."
Discovering a spreadsheet error was never going to end the debate over austerity - and nor should it, according to Megan McArdle, special correspondent for Newsweek and The Daily Beast.

"There is other research showing that you can have these slowdowns when you get to high levels of debt," she says. "We have a very vivid [example] in Greece."
Thomas Herndon 's view is that austerity policies are counter-productive. But right now he's delighted that the first academic paper he's ever published has made such a splash.

"I feel really honoured to have made a contribution to the policy discussion," he says.

Great story; thanks for the details, David. I'm much more interested in how the various ideologues on both ends of the political spectrum will adjust their arguments on how the political economy should be managed. Conservatives tend to view government budgeting as similar to family budgeting, so debt is a priori bad bad bad bad. Liberals tend to use debt instruments to further the nanny state, taking care of the old, poor and such.

The liberals' approaches seem to be favored by these new findings that economies continue to grow up to a point with increasing debt, significant debt, in fact.